Kristyn Wong-Tam and Stephen James Kerr: Toronto should start a bank

Toronto councillor Kristyn Wong-Tam and Toronto-based independent scholar, writer and filmmaker Stephen James Kerr have drafted a proposal they believe could help with the city’s budget shortfall and future financial health. They explain their proposal for a City-run Bank of Toronto.

By Kristyn Wong-Tam with Stephen James Kerr

When I recently read that Rogers Communications has applied for a bank license, I took it as yet more evidence that a proposal I’ve been working on to help Toronto resolve its fiscal problems can work: Toronto should be given the ability to raise funds through its own bank. Some people prefer to limit the discussion to only tax increases or service cuts, while ignoring creative ways, such as this, of dealing with insufficient revenues.

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Toronto is currently in the throes of a spurious fiscal crisis. We are told that there is a shortfall of revenue to finance the public services that Torontonians want and need. We are told that because there is “no money,” the city has no alternative but to “monetize” its assets or to gut the services expected by its residents. We are told the city must sell its heart and soul, including its libraries, parking lots and theatres to cover a supposed shortfall of funds.

Rogers wants to start up a bank of sorts to provide “a niche credit card opportunity” to Rogers’ clients. Whatever the merits of yet another consumer credit card “opportunity,” the Rogers application is likely to be accepted. Private credit creation and the charging of high interest rates on credit card debt is encouraged in today’s banking system. Public credit creation at low interest, for the public good, is not.

There is a solution to the “budget crisis” that will benefit all citizens and taxpayers in the City of Toronto, equally, and will allow city services to be preserved. It’s a new “revenue tool” conceived through financial re-thinking; a solution that Toronto’s top politicians have been asking for and an idea that can solve the “structural deficit.”

The solution is to put the creative power of credit back in public hands. The challenge before us is not a technical one. The means by which the City of Toronto could fund its services using credit as a public utility are well known, and we have several options from which to choose. What we face are political barriers to changing the current financial set-up, because of the many vested interests that stand to profit from the decimation of our public services and the selling-off of our public assets.

Plainly stated, Toronto should set up a citizen-owned bank. The “Bank of Toronto” would leverage money creation from our property tax revenues, user fees and capital assets through authority granted by Canada’s bank regulator. These would form a reserve as the basis for loans the Bank of Toronto could make for public purposes, including the re-development of our waterfront, the building of new subway lines, the renewal of our environmentally inefficient apartment towers, replacement of our aging water mains and other public works projects as determined by the citizens of Toronto. These loans would bear only nominal interest to cover the cost of the administration of the loans. This would dramatically lower the cost and improve the return on investment of large-scale capital projects, as they would be free from the interest cost of debt service. The money so created would be cycled through the existing banking system.

The Bank of Toronto would eventually retire outstanding municipal bonds. These debt instruments would no longer be required to finance the city’s capital projects which could now be funded at only nominal interest. Instead of borrowing money from bondholders, the City of Toronto should be creating it through the operations of its publicly owned bank. This would save Toronto the approximately $234.1-million per year in very real “gravy” that’s currently being paid out in unproductive interest payments.

The other mandate of the Bank of Toronto could be responsible lending, to local businesses at market interest rates for the express purpose of increasing the resilience and sustainability of the local economy. The Bank of Toronto would not undercut the Chartered Banks on rates, but rather service and grow an under-serviced market for commercial credit. Only local businesses could apply, and city council may wish to consider other criteria such as environmental sustainability in making loans. It’s up to the city’s democratically elected councillors and the people of Toronto to decide. The interest paid on these loans would be used to cover the operating costs of the Bank, and profits would be re-invested in the city. The goal is that money loaned out be reinvested in the local economy. The entire operation would not cost taxpayers an extra cent, but in fact could allow a property tax freeze to become a fiscally responsible position for the first time, as opposed to the reckless one it is today. All members of council should unite behind this fiscally responsible proposal.

Despite the Bank of Canada’s refusal to use its credit creation power to finance the Sheppard subway at nominal interest in 2001 at Toronto city council’s request, Section C of the Bank of Canada Act permits the Bank of Canada to purchase securities (bonds) from municipalities at nominal interest to fund various projects at a low cost. In response to council’s request, the Bank of Canada said “we are not authorized to loan funds to municipalities.” To be clear, I am not talking about borrowing money from the Bank of Canada at a low cost. I am talking about allowing the City to create credit just as the conventional banks do.

The failure of Toronto’s bid to create low-interest money for a public purpose, and the likely success of the Rogers’ bid to create money and consumer debt for private gain, exposes a fundamental flaw at the heart of our money system and, one that cripples governments and individuals with debt. It’s completely unnecessary.

Beginning in 1935, the federal government actively used the Bank of Canada’s credit creation power, but this practice fell out of favour in the 70s, when the Trudeau government, adopting the then fashionable policies of Milton Friedman, began turning to private banks for debt financing. But real world problems soon interfered with Friedman’s theories. When interest rates skyrocketed in the early 1980s, Canada’s public debt skyrocketed too. The national debt, 94% of which is compounded interest, remains an artificially created noose around the public’s neck, but one that is useful if your goal is to privatize public assets under the battle cry of “debt reduction.”

In Canada, and in every other country on Earth, money is created as credit, as debt. The power to create money is shared out between government and private banks. Currently the Bank of Canada creates approximately 5% of Canada’s money supply, while private banks create the other 95% by making interest bearing loans, a situation highly favourable to the private banks. In the past, the share of the money supply created by the government was more balanced. This period was marked by low inflation, and stable prices.

It’s worth restating that money is debt, and debt is money. Money is created by the act of loaning it into existence. If all debts were paid, there would be no money. Even demand deposits at the bank have no real material existence. If everyone tried to withdraw all their “money” at once there would be a massive crisis — a run on the bank — because there are insufficient paper notes in circulation (which are simply debt notes owed by the Bank of Canada) to “pay” all of the demand deposits at Canada’s Chartered Banks.

For the banks, demand deposits are a liability, and their loans — money owed to them with compound interest — are considered assets. Private banks are wealthy precisely because they have the legislated right to create these assets through exponential leveraging of legislated reserves, adding digital “chequebook money” to a borrower’s account whenever they sign a legal contract to repay a loan with interest. Because the banks don’t create the money to pay interest, this process of private credit creation at compound interest results in an increasing share of society’s real wealth being concentrated in a few hands. No wonder Rogers wants the right to create money. Who wouldn’t? How can we fault them for wanting to do what is permissible by law?

The time has come for the City of Toronto to re-think how money creation and civil society should intersect with one another. The richest 1% of Canadians control 32% of national income growth. Wealth in Canada has not been so unequal since the 1920s. This alarming economic polarization in our city has a direct effect on our democracy, as the people with wealth and power are generally those who have access to political leaders or become political leaders themselves. Some elected officials who prioritize private interests over the public interest have skillfully created a useful crisis by claiming that there’s a shortage of money when it could be argued that the only shortage is one of political will.

In setting up a Bank of Toronto, the city would be treading a well-worn path. North Dakota has used a state-owned bank to finance government operations and buttress the state economy for 90 years. It is due to the existence of this publicly owned bank, which provides very low interest credit to the state government, that North Dakotans have no public debt, while U.S. states at the mercy of private credit markets are deeply indebted. Establishing a publicly owned bank is currently under serious consideration by U.S. states and cities under the pressure of artificially created private debt. Toronto should be considering it too, because it’s a proven way out of our “budget crisis.”

There is no reason that Canadian society should continue to confer a near-monopoly on the creation of money to private banks. This private control renders the democratically elected representatives of the public incapable of deploying rational and people-centered solutions to some of our most pressing problems because we are trapped by debt and governed by the politics of cynicism.

It’s time for Toronto’s citizens to stand up to their political representatives and say no more cuts to city services. As a city councillor, I am obligated to offer an alternative in the public interest. This is a responsibility that I take seriously. I want Toronto to succeed. It is imperative all members of council work together. We can start by exploring the feasibility of creating Canada’s first municipally owned bank.

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